Not so great at saving? Well, you’re getting old, and that secure 9-5 job of yours that comes with a guaranteed paycheck at the end of the month will not always be there.
The best time to think about your retirement is last year; the second-best time is now! Most people know they’ll have their 401(k)s backing them up in their sunset years. Just a handful of people have grasped the additional retirement-revenue -stream idea that is Annuity. That begs the question, what is an annuity?
So what do annuities do? What are they used for? Well, to be brief, an annuity stems from a relationship between you and an insurance company that pays you interest over a period. It is an investment vehicle that allows you to get a guaranteed income stream.
Think of it as pensions plans for the new generation, and they’re great for you even if you don’t have the habit of making some savings.
What is an Annuity Calculator?
So, what is an annuity calculator? Precisely what its name implies – a calculator that calculates annuities.
However, let’s elaborate. An annuity calculator is a financial calculator used to determine how to allocate one’s savings to maximize the income that is produced by those savings.
An annuity calculator is synonymous with a retirement calculator or a life insurance calculator since they share the same variables:
- When might you need the money?
- How much can you afford to save now and later?
- How much income do you need in retirement?
An annuity calculator can be used to project the future growth of a single lump sum through annual payments of interest over a fixed period. It figures out what your monthly payment for an annuity will be.
Example of Annuity
Ever wanted to know how much money you’ll have if you invest $10,000 a year for the next 25 years? And if you invest that money in an 8% interest rate, how much will you make during that period? Or maybe you’d like to see what your income is when you’re at retirement age, but with a different income starting out.
Our annuity calculator crunches up those numbers for you with just one click!
How does Annuity Calculator Work?
This calculator is easy to use; enter your current age, the ages of expected children, and the amount of income you would like to generate each month over a given future period.
Don’t worry about the fluctuations in interest rates or future dips in your share prices, although you may need to rethink your retirement investments with those dips.
The calculated cash flows can be used to plan your lifestyle after retirement. You can then make sure a good retirement lifestyle lasts as long as possible.
The Annuity Calculator discounts cash flows back to the present day at an appropriate discount rate using a capital asset pricing model and developing a net present value for payments that will occur in the future. This nifty little tool will show you the effects of accepting one lump sum versus payments over time.
It will also tell you how much the calculated monthly investment would be beginning at a specific time and for a particular term of payment.
How Do You Calculate Annuity Payments?
You need to determine your interest rate. This is the percentage of the total amount that you’re earning over time through monthly payments. For example, if you’ve saved $10,000 and are earning 10% interest, your annuity is $1,000 per year.
There are three simple steps involved in annuity payments.
- Pick your perfect payment plan – choose a level, increasing or decreasing amount of each month’s payment.
- Choose your payment frequency – monthly, semi-monthly, or quarterly payments.
- Select your annuity – You need to determine your interest rate. This is the percentage of the total amount that you’re earning over time through monthly payments. For example, if you’ve saved $10,000 and are earning 10% interest, your annuity is $1,000 per year.
Types of Annuities
All annuities are not created equal. There are so many factors that determine which annuity will be right for you. Don’t be lured by low introductory rates or other short-term incentives. There are:
1. Fixed Annuities
With fixed, your income is guaranteed not to rise or fall. However, it will also not increase as you get older.
2. Variable Annuities
With variable annuities, you will receive a higher rate after a specified number of years.
3. Indexed (Equity-Indexed Annuities)
Indexed annuities are guaranteed to increase with increases in the named market index.
The Pros of Annuities
1. Regular Payments over the Years
The obvious benefit of an annuity is the regular paycheck you will be getting from your insurance company over the months in your retirement. These cheques would come in particularly handy if you were not doing much savings during your work life.
3. Annuity Payments are Tax-Deferred
Any amount you contribute towards your annuity is not taxed, at least not yet. They are tax-deductibles! However, you will start paying tax once the annuity payments start coming in, and that will be during your retirement years.
3. Guaranteed Payment Rate
Sure, there are a billion and one investment options you could pursue to generate enough return to secure your retirement life. However, very few come with a guaranteed payback.
Annuities top that list of few, as your insurance company takes your regular annuity contributions during your working life and invests them. They shoulder the risks of the investment but guarantee you a constant payback rate on your investment. Although the margin is smaller than if you had invested in high-risk portfolios, the payback is guaranteed.
4. Death Benefits
Variable annuities can seem undesirable given that paybacks can vary subject to economic conditions. However, they do come with an extra perk; your beneficiaries get paid when you pass.
In most instances, basic variable annuity gives the departed’s beneficiaries a sum equal to the annuity amount contributed during their lifetime.
The Cons of Annuities
1. Variable Annuities could be Expensive
Before picking a given variable annuity, make sure you understand all the fees that come with the perk. Variable annuity tends to have administrative, expense risk, and mortality fees. It is common for insurance companies to place an 11.25% charge on variable annuities accounts.
2. Money Invested in an Annuity may be more than the payback
Insurance companies take the money you pay into your annuity account and invest it. For instance, they might invest in the stock market and have a good run.
However, the amount they will pay you back does not grow in the same ratio of profits they made trading in the stock exchange. It will be the previously agreed ratio, regardless of their investment has a higher payout.
3. It is hard or next-to-impossible to get out of Annuity
Some annuities like immediate annuities don’t give back or pass on money to the beneficiaries. The best you could hope for is to transfer that money into a different annuity plan, and even then, there are some fees you will pay.
Additionally, in the instance of immediate annuities, when you pass on, your beneficiaries will not get paid the sum.
How Do You Buy an Annuity?
When it comes to annuities, there’s no one-size-fits-all. People have different family sizes and demands from dependents, among other factors. So you need to sit down with your financial advisor to come up with a product that matches your needs. The steps below can be applied.
1. Evaluate your Current Needs versus your Future Needs
First, establish your current needs versus your cash income to know the right annuity vehicle for you. Then extrapolate your future financial needs versus the annuity payback you would desire then. This information will help you choose the right annuity plan regarding how much you can pay now and how much you wish to get in the future.
2. Choose your Annuity objectively
Your annuity choice should be as objective as possible and entirely based on your practical needs. That would require you to be as transparent as possible on your current cash flows and expenditures to zero in on the right annuity plan for you.
3. Choose the Right Annuity Provider
Be mindful of the fact that the federal government does not back annuities like 401(k)s. There are numerous annuity providers out there in the market, and they’re not all equal. Be sure to vet them thoroughly before picking one for your annuity plan.
4. Purchase the Annuity
Following the steps above, you can purchase your annuity from the right provider. Your purchase can be made via cash, retirement funds, or you can do a transfer from your brokerage account. You also need to be cautious about the tax implication of such transfers.
FAQs
How Much Does a $100,000 Annuity Pay Per Month?
A $100,000 annuity will pay you a lot every month. But how much exactly? That depends on a lot of factors including how long you’ll live, what taxes are due, and whether or not you take a lump-sum payment. So let’s break it down.
Purchasing a $100,000 annuity at age 65, with the first monthly payment due in 30 days, would pay you approximately $521 per month for the rest of your life. Please contact us for additional information concerning this supplemental retirement income opportunity and to find out if an immediate annuity or other investment is right for you.
